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Air France-KLM Details Massive Restructuring Effort

Air France-KLM has launched a major restructuring program to reduce annual costs by €1 billion($1.28 billion), primarily at its Air France unit. Details of the plan were presented on Thursday after the close of the Paris stock market. Measures include a pay and hiring freeze, slower-than-planned capacity growth and some aircraft deferrals.

The airline group made clear that it will grow only 5% cumulatively in the next three years, a move strongly encouraged by analysts and observers. “The board deemed it necessary to opt for quasi-stable capacity for the Air France-KLM Group in both passenger and cargo,” the company said.

Fleet investment will decline to €5 billion in the next three years, compared with €6 billion in the 2009-2011 period. Air France-KLM plans to defer delivery of one AirbusA380 from 2014 to 2016, two Airbus A320s due in 2012 will arrive in 2013 and 2014. One Boeing 777-300ER will be taken in 2016 instead of 2015 and two options are canceled. The airline did not change its plans to acquire 25 Boeing787s and 25 A350s. The 787 order has already been finalized, and Air France CEO Alexandre de Juniac says that the A350 deal is likely to be finalized “in the next few weeks.”

Net debt is to be reduced by some €2 billion to €4.5 billion between now and the end of 2014.

Wages will be frozen at Air France for two years and there will be a policy of “wage moderation”–meaning only slow increases–in place at KLM. The group plans to reduce overhead costs, improve efficiency and cut the network where needed, but no layoffs are planned for the time being. Negotiations with unions over measures are to “begin rapidly.” The focus will be on the passenger business, “but cargo and maintenance will also have to redefine their conditions for profitability,” Air France-KLM says.

The company admits that “the structural decline in unit revenues has led to deepening losses” in the short- and medium-haul business. It estimates those losses totalled €700 million in 2011.

“Long-haul operations, also subject to increasing competition, cannot alone offset these losses,” the company says. Therefore, Air France-KLM aims at “better utilization of aircraft and assets.” The company also did not rule out “more extensive outsourcing in some areas,” but it did not go into specifics. The airline hopes to reach breakeven in the short- and medium-haul segment by the year 2014.

Air France-KLM plans to issue a progress report in March and present all details of the transformation plan in the summer.

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